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Wednesday, July 30, 2014

Surely the most momentous social change of our times began sometime in
the 1960s or '70s when parents decided their daughters were just as
entitled to an education as their sons. Girls embraced this opportunity
with such diligence that today they leave schools and universities
better educated than boys.

Fine. But this has required much change to
social and economic institutions, which we've found quite painful and is
far from complete. It's changed the way marriages and families operate -
changed even the demands made on grandparents - greatly increased
public and private spending on education, led to the rise of new classes
of education and childcare, changed professions and changed the
workplace.

It has led to greater "assortative mating", where
people are more likely to marry those not just of similar social
background, but of a similar level of education.

For centuries the
labour market was built around the needs of men. Changing it to
accommodate the needs of the child-bearing sex has met much resistance,
and we have a lot further to go. This is evident from last week's report
of the Human Rights Commission, which found much evidence to show
"discrimination towards pregnant employees and working parents remains a
widespread and systemic issue which inhibits the full and equal
participation of working parents, and in particular, women, in the
labour force".

You can see this from a largely social perspective -
accommodating the rising aspirations of women and ensuring they get
equal treatment - or, as is the custom in this more materialist age, you
can see it from an economic perspective.

By now we - the
taxpayer, parents and the young women themselves - have made a hugely
expensive investment in the education of women. It accounts for a little
over half our annual investment in education.

If we fail to make it
reasonably easy for women to use their education in the paid workforce,
we'll waste a lot of that money. Our neglect will cause us to be a lot
less prosperous than we could be.

Of late, economists are worried
our material standard of living will rise more slowly than we're used
to, partly because mineral export prices have fallen but also because,
with the ageing of the baby boomers, a smaller proportion of the
population will be working.

They see increased female
participation in the labour force - more women with paid work, more
working women with full-time jobs - as a big part of the answer to this
looming catastrophe (not).

But how? One way would be to impose more
requirements on employers, but in an era where the interests of business
are paramount, politicians are reluctant to do that. Make employers
provide childcare or paid parental leave? Unthinkable.

So, for the
most part, taxpayers have picked up the tab. Government funding of
childcare has reached about $7 billion a year, covering almost
two-thirds of the total cost. The cost of government-provided paid
parental leave is on top of that.

Governments' goals in childcare
have evolved over time. In the '70s and '80s, the focus was on
increasing the number of places provided. In the '90s, the focus shifted
to improving the affordability of care, with the introduction of,
first, the means-tested childcare benefit, and then the unmeans-tested
childcare rebate. Under the Howard government, the rebate covered 30 per
cent of net cost, but Labor increased it to 50 per cent.

More
recently, increased evidence of the impact of the early years of a
child's life on their future wellbeing has shifted governments'
objectives towards child development and higher-quality, more
educationally informed, childcare. This includes getting all children to
attend pre-school. Linked with this has been a push to raise the pay of
childcare workers.

The federal government asked the Productivity
Commission to inquire into childcare and early childhood learning. Last
week it produced a draft report. I suspect the pollies were hoping the
commission would find a way to reduce regulation of what they kept
calling the childcare "market"; thus improving workforce participation
and "flexibility" while achieving "fiscal sustainability".

If so,
they wouldn't have been pleased with the results. The main proposal was that the childcare benefit and rebate be combined into one, means-tested
subsidy payment paid direct to childcare providers.

This would
involve low-income families getting more help while high-income families
get less. There would be a small additional cost to the government, but
this could be covered by diverting money from Tony Abbott's proposed
changes to paid parental leave. It was "unclear" his changes would bring significant additional benefits to the community.
The commission wasn't able to
claim its proposals would do much to raise participation in the labour
force, mainly because our system of means-testing benefits - which works
well in keeping taxes low, something that seems to be this government's
overriding goal - means women face almost prohibitively high effective
tax rates as their incomes rise, particularly moving from part-time to
full-time jobs.

Like the Henry tax review before it, the commission
just threw up its hands at this problem. And even the commission couldn't
bring itself to propose major reductions in the quality of education and
care. Sorry, no easy answers on childcare.

Monday, July 28, 2014

Joe Hockey and Tony Abbott are perfectly right in saying we need to get
the budget back into surplus, we need to make a start now and that this
will inevitably involve unpopular measures.

But this makes it all the
more puzzling that, lacking a majority in the Senate and being unable to
claim a "mandate" for breaking many election promises, they should
adopt such a highly ideological and unfair collection of budget
measures.

In a three-part essay on John Menadue's blog last week,
Dr Michael Keating, former senior econocrat, argues that as a nation
we're "unlikely to succeed in charting a viable way forward to fiscal
sustainability until governments are prepared to subject their views to a
proper conversation based on a clear appreciation of the pros and cons
of the different alternatives.

"Only in that way can the public
support be built that is required to achieve future fiscal
sustainability. In present circumstances it is hardly surprising that
this necessary support is not forthcoming, when less than 12 months ago
the government promised in the election to both spend more and tax less
and now seeks to impose a most unfair budget on the community with no
prior warning nor any such mandate."

If we are to chart a way
forward and establish the necessary public understanding and consensus,
he says, we particularly need to drop the ideology surrounding the
merits of taxation versus expenditure and consider the claims of each
tax and expenditure proposal on its merits.

Just so. There are
many ways to skin the budget cat - some fairer or more sensible than
others - and it's absurd for the government and its barrackers to
pretend, Maggie Thatcher-like, that the measures proposed in the budget
are the only alternative to irresponsible populism.

And
anyone who knows much about economics knows there's little empirical
evidence to support the ideology that economies with high levels of
government spending and taxation don't perform as well as those with low
levels.

Yet Hockey and Abbott thought it sensible to propose a
10-year budget plan that relied almost exclusively on cuts in government
spending - apart from the temporary deficit levy and
much unacknowledged bracket creep.

Keating points out that,
combining all levels of government as a percentage of gross domestic
product, Australia already has the lowest budget deficit and public debt
compared with Canada, Japan, Britain, the US and the OECD average.

At
26.5 per cent, our level of total taxation seems higher than the
Americans' 24 per cent, until you remember their budget deficit is 5
percentage points higher than ours. So the claim that we have a bloated,
"unsustainable" level of government spending is itself unsustainable.

To
restore some balance to proposed budget savings, to share the burden of
budget repair more fairly and in answer to the challenge, well, what
would you do? Keating suggests savings on the revenue side that would
raise about $42 billion a year in 2017-18, the year most of Hockey's
savings would cut in.

One objectionable feature of the budget was
the way it laid into spending on the age pension while not merely
ignoring the equally expensive superannuation tax concessions but
actually reversing some of Labor's timid attempt to make aged-income
support fairer. Keating estimates a more balanced approach to tax
concessions could save $15.5 billion a year.

To extend the "end of
entitlement" beyond welfare recipients to business welfare, he suggests
ending the fuel excise rebate for miners and farmers, saving $7.5
billion a year. There's no economic justification for subsidising just
one input among many of just two industries among many.

Abolishing
the subsidy for private health insurance would save more than $7
billion a year. Many evaluations have shown this money would treat a
greater number of patients if spent in public hospitals. Removing the 50
per cent discount on capital gains tax would save $5 billion a year, as
well as making the taxation of various sources of income a lot fairer.

About
$5.5 billion a year could be saved by restoring the carbon price
mechanism and the minerals resource rent tax. That leaves $1.5 billion
to be saved by restoring anti-avoidance measures implemented by Labor,
Keating says.

We could get the budget back in the black without
any loss of economic efficiency and do it in a way much fairer to
ordinary voters - remember them? - and less partial to the Coalition's
big business backers.

Saturday, July 26, 2014

Almost six years since the global financial crisis reached its
height, it's easy to forget just how close to the brink the world
economy came. To someone like Reserve Bank governor Glenn Stevens,
however, those events are burnt on his brain.

Which explains why he thought them worth recalling in a
speech this week. And also why, so many years later, the major developed
economies of the North Atlantic are still so weak and showing little
sign of returning to normal growth any time soon.

When those key decision-makers who lived through 2008 and
2009 say that there was the potential for an outcome every bit as
disastrous as the Great Depression of the 1930s, "I don't think that is
an exaggeration", he says.

"Any account of the events of September and October 2008
reminds one of what an extraordinary couple of months they were.
Virtually every day would bring news of major financial institutions in
distress, markets gyrating wildly or closing altogether, rapid
international spillovers and public interventions on an unprecedented
scale in an attempt to stabilise the situation.

"It was a global panic. The accounts of some of the key
decision-makers that have been published give even more sense of how
desperately close to the edge they thought the system came and how
difficult the task was of stopping it going over."

But, despite the inevitable "mistakes and misjudgments", the
authorities did stop it going over. Stevens attributes this to their
having learnt the lessons of the monumental mistakes and misjudgments
that that turned the Great (sharemarket) Crash of 1929 into the Great
Depression.

Economic historians (including one Ben Bernanke) spent
decades studying the Depression and, in Stevens' summation, they came up
with five key lessons: be prepared to add liquidity – if necessary, a
lot of it – to financial systems that are under stress; don't let bank
failures and a massive credit crunch reinforce a contraction in economic
activity that is already occurring – try to break that feedback loop;
be prepared to use macro-economic policy aggressively.

So far as possible, maintain dialogue and co-operation
between countries and keep markets open, meaning don't resort to trade
protectionism or "beggar-thy-neighbour" exchange rate policies. And act
in ways that promote confidence – have a plan.

There was a lot of action and a lot of international
co-operation, and it worked. As a result, we talk about the Great
Recession, not the Great Depression Mark II.

"We may not like the politics or the optics of it all – all
the 'bailouts', the sense that some people who behaved irresponsibly got
away with it, the recriminations, the second-guessing after the event
and so on," he says. "But the alternative was worse."

With collapse averted, the next step was to fix the broken
banks. Their bad debts had to be written off and their share capital
replenished, either by them raising capital from the markets or
accepting it from the government.

Fixing the banks' balance sheets was necessary for recovery,
but not sufficient. A sound financial system isn't the initiating force
for growth, so stimulatory macro-economic policies were needed to get
things moving.

On top of all the government spending to recapitalise the
banks came a huge amount fiscal (budgetary) stimulus spending. Stevens
says a financial crisis and a deep recession can easily add 20 or 30
percentage points to the ratio of public debt to gross domestic product.

Then you've got the weak economic growth leading to far
weaker than normal levels of tax collections. Add to all that the
various North Atlantic economies that had been running annual budget
deficits for years before the crisis happened.

"So fiscal policy has not had as much scope to continue
supporting recovery as might have been hoped," Stevens says.
"Policymakers in some instances have felt they had little choice but to
move into consolidation mode [spending cuts and tax increases] early in
the recovery."

He doesn't say, but I will: this crazy, counterproductive policy of "austerity" has helped to prolong the agony.

With fiscal policy judged to have used up its scope for
stimulus, that leaves monetary policy. Central banks cut short-term
interest rates hard, but were prevented from doing more because they
soon hit the "zero lower bound" (you can't go lower than 0 per cent).

But long-term interest rates were still well above zero and,
in the US and the euro area, long-term rates play a more central role in
the economy than they do in Oz. Hence the resort to "quantitative
easing".

Under QE, the central bank buys long-term government bonds or
even private bonds and pays for them merely by crediting the accounts
of the banks it bought from. Adding to the demand for bonds forces their
price up and yield (interest rate) down. And reducing long-term rates
is intended to stimulate borrowing and spending.

Has it worked? It's intended to encourage risk-taking, but
are these risks taken by genuine entrepreneurs producing in the real
economy, or are they financial risk-taking through such devices as
increased leverage?

Stevens' judgment is that it always takes time for an economy
to heal after a financial crisis [because it takes so long for banks,
businesses and households to get their balance sheets back in order
- they've borrowed heavily to buy assets now worth much less than they
paid] so it's too soon to draw strong conclusions.

For Stevens, the lesson is that there are limits to how much
monetary policy can do to get economies back to healthy growth after
financial crises. "If people simply don't wish to take on new business risks, monetary policy can't make them," he says.

Perhaps the answer is simply subdued "animal spirits" – low
levels of confidence, he thinks. But, at some stage, sharemarket
analysts and the investor community will ask fewer questions about risk
reduction and more about the company's growth strategy.

So, the Reserve Bank has done the numbers and killed the
Great Australian Dream: owning your home is no more lucrative than a
lifetime of renting. Somehow, I doubt that will be the end of the matter
- and nor should it be.

The strongest conclusion we should draw from the Reserve’s
figuring is that, when you view home ownership purely as a financial
investment, buying rather than renting isn’t the deadset winner most
people assume.

It can be a close run thing, mainly because people take
insufficient account of the costs of home ownership - not just all the
interest they pay but the stamp duty and conveyancing costs, insurance,
repairs and maintenance and the rates and other payments not borne by
renters.

But our deeply ingrained belief that home ownership is a
great investment is only one of our motives for wanting to own rather
than rent. The other big one is security of tenure.

It’s nice to own your own place and make your own decisions
about alterations and improvements, minor and major, about painting it
or not painting, building up the garden or not bothering.

It’s also nice to know you’re unlikely to have to leave it
unless it’s your choice. Renters generally have a lot less say over how
long the rental lasts, rent rises and changes of landlord.

The Reserve’s calculations take no account of these
non-monetary considerations, which could easily be sufficient to bring
ownership in as a clear winner in many people’s minds (starting with
me).

And though those calculations are as careful and impartial as
you would expect of the central bank, that doesn’t stop them being
based on assumptions and averages like all such calculations, meaning
they may or may not be a good fit with your own circumstances and
preferences.

For instance, what’s true for average home prices across
Australia, may not be true for Sydney. And what’s true for the whole of
Sydney may not be equally true for inner ring, middle ring and outer
ring homes.

We know the authorities expect huge growth in Sydney’s
population over the next 20 or 30 years. And unless they greatly improve
their performance on congestion, my guess is we will see inner-ring
property prices grow a lot faster than Sydney prices generally.

The Reserve’s calculations roll together home owners and
renters of all ages and stages. But switching rental accommodation is
not the problem for young adults that it can be for families with
school-age children.

The calculations assume home owners change homes every 10
years. If you have already, or intend to, stay put a lot longer than that then
your investment is already performing, or is likely to perform, better
than the figures suggest.

Of course, no calculations based on what’s happened to home
prices and rents over the past 60 years is a foolproof guide to what
they’ll do over the coming 60.

And remember, the low level at which the age pension is set
tacitly assumes people own their homes outright. The value of your home
isn’t included in the means test, but other investments are.

Wednesday, July 23, 2014

Old notions die hard. If you took all the production of goods and
services in Australia and plotted on a map where that production took
place, what would it look like?

Any farmer could tell you most of the
value is created in the bush. A miner, however, would tell you - a bunch
of ads have told you - these days most of the wealth is generated in
areas such as the Pilbara in Western Australia and the Bowen Basin in
Queensland.

Then, of course, there are the great manufacturing
states of Victoria and South Australia - with most work done in the
suburbs of Melbourne and Adelaide, but also regional cities such as
Geelong.

That make any sense to you? It's completely off beam.

A
report issued this week by the Grattan Institute finds that, these
days, 80 per cent of the dollar value of all goods and services in
Australia is produced on just 0.2 per cent of the nation's land mass.
Just about all of that is in our big cities, as close in as possible.

The
report, by Jane-Frances Kelly and Paul Donegan, finds that big cities
are now the engines of our prosperity. If you take just the central
business districts of Sydney and Melbourne - covering a mere 7.1 square
kilometres - you have accounted for almost 10 per of Australia's gross
domestic product.

What do workers do in all those city offices? Nothing you can touch. That's how much the economy's changed.

To
find the economy as many people still imagine it to be, you have to go
back 50, even 100 years. About 100 years ago, almost half Australia's
population of 4 million lived on rural properties or in small towns of
fewer than 3000 people.

Many of these would have been market towns
serving the agricultural economy. Agriculture and mining accounted for a
third of the workforce. And only about one in three Australians lived
in a city of at least 100,000 people.

These days, agriculture
employs only 3 per cent of workers and contributes only 2 per cent of
GDP. Our two biggest CBDs contribute at least four times that much.

By
the end of World War II, manufacturing had become Australia's dominant
industry. At its height in 1960, the report reminds us, manufacturing
employed more than a quarter of the workforce and accounted for almost
30 per cent of GDP.

The rise of manufacturing shifted much of our
economic activity - our prosperity - to the big cities, but mainly to
the suburbs. Suburbs away from city centres had lower rents and less
congestion.

Postwar growth in car ownership made possible the
shift to a manufacturing economy with a strong suburban presence. It
also led to the demise of many small towns and the rise of regional
centres.

Today, however, manufacturing employs only 9 per cent of
the workforce and accounts for just 7 per cent of GDP. The thing to note
is that this seeming decline in manufacturing has involved only a small
and quite recent fall in the quantity of things we manufacture in Oz.

Similarly,
the decline in agriculture's share of employment and GDP has occurred
even though the quantity of rural production is higher than ever. The
trick is that these industries didn't contract so much as other parts of
the economy grew a lot faster, shrinking their share of the total.

One
of those other parts is mining, of course. But get this: "While
Australia's natural resource deposits are typically in remote areas,
workers in cities make a critical contribution to the industry's
success," the report says.

"For instance, in Western Australia,
where the most productive mining regions are located, more than one
third of people employed in mining work in Perth."

That's partly
because of fly-in fly-out, but mainly because many of these workers are
highly skilled engineers, scientists, production managers, accountants
and administrators.

So what explains the greater and still-growing
economic significance of big cities, so that Sydney, Melbourne,
Brisbane and Perth now contribute 61 per cent of GDP? The rise of the
knowledge economy.

Increasingly, our prosperity rests not on
growing, digging up or making things, but on knowing things. Our
workforce is more highly educated than ever, and this is the result.

"Knowledge-intensive
jobs are vital to the modern economy. They drive innovation and
productivity, and are a critical source of employment growth. In the
last 15 years there has been much higher growth in high-skilled,
compared to low-skilled, employment," the report says.

Knowledge-intensive
activities aren't confined to jobs in the services sector, but are also
increasing in mining and manufacturing. They often involve coming up
with new ideas, solving complex problems or finding better ways of doing
things.

But here's the trick: it suits many of the knowledge workers,
and the businesses that employ them, for those workers to be crowded
into big cities, as close in as possible. When you're all packed in
together, there's more scope for the transfers of expertise, new ideas
and process improvements known as "knowledge spillovers".

Such
spillovers come particularly through face-to-face contact. Large cities
offer employers knowledge spillovers and a large skilled workforce. They
also offer people greater opportunities to get a job, move to a better
job, build skills and bounce back if they lose their job.

Monday, July 21, 2014

The mining tax - whose last-minute reprieve may well prove temporary -
is the greatest weakness in the argument that we gained a lot from the
resources boom. The blame for this failure should be spread widely, with
economists taking a fair share.

Late last week a majority of senators
passed the bill repealing the minerals resource rent tax, but not
before knocking out its provisions cancelling various programs the tax
was supposed to be paying for.

The government is refusing to
accept the amended version of the bill, arguing that "by voting to keep
many of the associated spending measures [naughty - most are actually
tax expenditures], senators have effectively voted to keep the mining
tax".

We'll see how long that lasts. But if you're thinking the
tax raises so little it hardly matters whether it stays or goes, you're
forgetting something. When Labor allowed BHP Billiton's Marius Kloppers
and his mates from Rio Tinto and Xstrata (now Glencore) to redesign the
tax, they predictably opted to take their depreciation deductions
upfront. Once they're used up, however, receipts from the tax will be a
lot healthier - provided it survives that long.

You can blame
Kevin Rudd, Wayne Swan and Julia Gillard for their hopeless handling of
the tax. But don't forget to copy in Tony Abbott who, faced with a
choice between the interests of Australian taxpayers and the interests
of three foreign mining giants, sided with the latter in the hope they'd
fund his 2010 election campaign.

You can also blame Treasury for
originally proposing an incomprehensible, textbook-pure version of the
tax which couldn't survive, and so getting us lumbered with a
fourth-best version. It also did a bad job of quietly test-marketing the
tax with its banking contacts and of estimating the likely receipts.

But
where were all the economists - including academics - explaining to the
public why the tax wouldn't discourage mining activity or otherwise
damage the economy, as it suited the big miners to claim?

Where
were the economists explaining the special need for a resources rent tax
in the case of the exploitation of mineral deposits, particularly when
the miners were so largely foreign-owned?

As usual, they were keeping
their mouths shut. Contribute their expertise to the public debate? Why?
Better just to criticise from the sidelines.

Part of the problem
is an ethic among economists that regards it as bad form to distinguish
between local and foreign investors for fear of inciting "economic
nationalism" - a form of xenophobia. If an investment generates jobs and
income, why does it matter whether the firms involved are local or
foreign?

It's no doubt thanks to this ethic that we do such a bad
job of measuring foreign ownership (and so deny ourselves the ability to
use hard facts to fight xenophobic impressions that foreigners now own
everything). But the best guess is that mining is about 80 per cent
foreign-owned.

Trouble is, mining is an obvious exception to this
generally sensible aversion to economic nationalism, for two reasons:
because our abundant natural endowment makes minerals and energy such a
huge source of economic rent and because mining is so extraordinarily
capital-intensive.

Added to that, as Dr Stephen Grenville (a
former senior econocrat who does make a useful contribution to the
public debate, via the Lowy Institute) has written, "mining royalties, a
state government domain, fall victim to special relationships and
inter-state competition to attract projects".

Put all that
together and you see why having an effective resource rent tax is so
essential to ensuring Australians get a fair reward for the exploitation
of their birthright. High economic rents, few jobs created and the
lion's share of profits going to foreigners mean unless especially high
rates of profitability are adequately taxed we don't have a lot to show
for the resources boom.

Saying that isn't anti-foreigner, it's
simple self-interest, the driving force of market economies. Foreigners
are welcome, provided we get a fair share of the benefits. Foreign
investment isn't meant to be a form of aid to rich foreigners.

It's
true our rate of national saving increased during the boom. But a lot
of this was foreign-owned mining firms reinvesting their profits in
local expansion rather than repatriating them, thereby increasing their
share of our productive assets.

Now the construction phase is
ending, more of the (undertaxed) profits will be sent back home. And the
capital-intensive production and export phase will mean each $1 billion
of growth in GDP now creates fewer jobs than it used to. Thank you
Labor, thank you Coalition, thank you economists.

Saturday, July 19, 2014

Tony Abbott's strategy for getting back into government was to make
himself a small target by adopting few controversial policies. He
mollified his big business backers by promising to hold many inquiries
and take any proposals for controversial reform to the 2016 election.

But
once in government Abbott couldn't avoid announcing many unpopular
measures to get the budget back on track. These have hit his standing in
the polls, while causing difficulty and delay in getting budget
measures through the Senate.

It's likely a lot of them won't pass,
implying the government will have to put a lot of effort into finding
more palatable savings. Even then, some of this year's unpopular
measures - particularly the age-pension changes - will have to be
defended at the election.

Meanwhile, most of a year has passed
without the government getting on with its promised inquiries into
controversial issues such as industrial relations, tax reform and
federal-state relations (think three letters: GST).

Not a lot of
time is left for the various inquiry processes to report, for the
government to consider the reports, decide what reforms it proposes and
then explain and justify them to voters before the election.

Does
Abbott's unexpected radicalism on budget measures presage equally
radical proposals in these other issues? If so, the next election
campaign will be a lot more exciting than the last one.

Or does
all the hostility he has aroused just with his budget measures make it
more likely Abbott won't want to bite off a lot more trouble on other
fronts?

On the question of industrial relations reform, Abbott and
his minister, Eric Abetz - not to mention the Productivity Commission,
which will be conducting the inquiry - would do well to ponder a recent
speech by Geoff McGill, a long-experienced industrial practitioner and
now a visiting scholar at Sydney University's Workplace Relations
Centre.

McGill observes that the history of federal industrial
relations legislation "has been punctuated by swings in the IR pendulum
across the political cycle". First the Howard government's Work Choices
swung the pendulum in favour of employers, then the Labor government's
Fair Work swung it back towards the unions.

Now big business and
its cheer squad in the national dailies want the restored Coalition
government to give the IR pendulum another shove back in the direction
to the employers. Isn't this the way the political game is played?

It
is. But McGill questions whether continuing to play that way is the
best way to get where we want to go. The advocates of yet another round
of industrial relations "reform" justified it mainly by arguing the need
for faster improvement in the productivity of labour.

That's something
all sides can agree is a desirable objective. But McGill shoots down
some wishful thinking on the topic. "Productivity growth is a complex
process and usually described in simplistic terms," he says. "It can
never be assumed and is only evident after the event.

"There is
little evidence to support claims that particular changes in industrial
relations legislation will boost national labour productivity."

It's
the substance of the employment relationship, not its legal form, which
determines whether people are engaged and productive, he says.
Productive workplaces are not the outcome of legislation, but of the
quality of leadership and culture at the workplace.

Surely there must be a law against someone speaking such obvious sense.

McGill
brings to mind another point. Much of the thinking behind "the end of
entitlement" and the unpopular budget measures is about saying
governments can't solve all your problems for you (just the opposite of
the message all politicians spread during election campaigns). It's not
possible and, in any case, it's not healthy for people to be so
dependent on the authorities.

True enough. But if that's what the
government is telling everyone from the young unemployed to uni students
to age pensioners, why is it allowing big business to imagine its
industrial relations problems should - or even could - be solved by the
government changing the law?

Actually, my guess is most of
business isn't silly enough to think that. The push is probably coming
from lobbyists trying to justify their fee, journos trying to sell
newspapers and a relative handful of belligerent employers facing
equally belligerent unions and hoping the government will give them some
new stick to beat over the heads of their opponents.

Another
point of McGill's: if we want better industrial relations leading to
greater productivity improvement and the main way for employers to bring
this about lies in the workplace, maybe a better way to encourage them
to focus on the domestic challenge is to give them a period of
legislative stability rather than more changes in the rules of the game.

Most
successful managers understand that getting along with people - winning
their regard, respect, support, trust, loyalty and co-operation - works
better than getting heavy and legalistic. That's how you get better
industrial relations - by, as McGill says, putting more emphasis on the
relations and less on the industrial.

Managers like to be kept in
the loop. Guess what? So do workers. Smart managers keep their staff
well informed about the company's performance and the challenges it
faces, and give early warnings - even to the union - about any need for
nasties like redundancies. They never risk a breakdown in relations by
telling workers things they subsequently discover to be untrue.

You
engender co-operation by treating people well, consulting them, giving
them a degree of autonomy, rewarding loyalty and sharing the business's
proceeds fairly between shareholders, managers and staff. Workers accept
a hierarchical pay structure, but you don't cause envy and disaffection
by rewarding some equals more than others.

And if you don't like
outside union officials coming into your workplace, you keep your
workers so happy they never need to call them in.

Wednesday, July 16, 2014

Tony Abbott is right about one thing: the price of
electricity has shot up and is now a lot higher than it should be. It's a
scandal, in fact. Trouble is, the carbon tax has played only a small
part in that, so getting rid of it won't fix the problem.

Until a
rotten system is reformed, the price of electricity will keep rising
excessively, so I doubt if many people will notice the blip caused by
the removal of the carbon tax. (As for the price of gas, it will at
least double within a year or two, as the domestic price rises to meet
the international price, making the carbon tax removal almost
invisible.)

So Abbott will be in bother if too many voters
remember all the things he has said about how much the tax was
responsible for the rising cost of living, how much damage the tax was
doing to the economy and how much better everything would be once the
tax was gone.

He would be wise to change the subject and join the push to reform the electricity pricing arrangements.

A
new report by Tony Wood and Lucy Carter, of the Grattan Institute, Fair
Pricing for Power, says that over the past five years the average
Australian household's electricity bill has risen by 70 per cent to
$1660 a year.

And this has been happening while the amount of
electricity we use has been falling, not rising. Just why electricity
demand has been falling is a story for another day.

The cost of
actually generating the power accounts for 30 per cent of that total.
The cost of delivering the power from the generator to your home via
poles and wires - that is, the electricity transmission and distribution
network - accounts for 43 per cent of the total.

That leaves the
costs of the electricity retailer - the business you deal with -
accounting for 13 per cent of the total bill, with the carbon tax making
up 7 per cent and the various measures to encourage energy saving or
use of renewables making up the last 7 per cent.

Of these various
components, the one that does most to account for the rapid rise in
overall bills is the cost of the physical distribution network. Whereas
there's fierce competition between the now mainly privately owned power
stations, the network businesses - still government-owned in NSW and
Queensland, but privatised in Victoria and South Australia - are natural
monopolies.

This means the prices the networks are allowed to
charge - whether government or privately owned - are regulated by
government authorities. And this is the source of the problem. Loopholes
in the price regulation regime have made it easy for the network
businesses to feather their nest at the expense of you and me.

Why
would a government-owned network business want to overcharge? Because
their profits are paid to the state Treasury, which needs all the cash
it can get. So the NSW and Queensland governments gain by looking the
other way while their voters are ripped off. The gouging hasn't been
nearly as bad in privatised Victoria, where electricity prices are well
below the national average.

An earlier report from the Grattan
Institute identified four main faults in the system used to regulate the
prices of network businesses: the pricing formula allows excessive
rates of return, considering essential monopolies are low-risk;
government ownership leads to excessive investment in infrastructure and
reduced efficiency; reliability standards to prevent blackouts are
wastefully high; the pricing formula rewards investment in facilities
you don't really need.

The various combined state and federal
regulatory bodies have belatedly begun attempting to fix these problems,
but they could do a lot more if the politicians prodded them harder.

Meanwhile,
the latest Grattan report proposes a solution to one aspect of the
over-investment problem: coping with peak demand. The trouble with
electricity networks is that, if you want to avoid blackouts, the
network has to be powerful enough to cope with the periods when a lot of
people are using a lot of electrical appliances at the same time, which
these days is a hot afternoon.

Over the course of a year, these
occasions are surprisingly few, so you end up having to build a lot of
capacity, which is expensive, but then is rarely used. It would make far
more sense to encourage people to avoid such extreme peaks in their
demand.

The way the pricing system works at present, however, is that far from discouraging people from buying airconditioners and turning them on full blast on very hot afternoons, they're subsidised by those householders who don't.

The
simple answer would be for the part of people's bills that relates to
their share of network costs to be changed from charging for how much
power they use to a capacity-based charge. That is, they pay according
to the maximum load they put on the network in peak periods.

The
result would be to remove the subsidy between high and low-capacity
users, increasing or reducing their bills by up to $150 a year.

The
greater benefit would be the price signal sent to high-capacity users
to reduce their use of appliances during peak periods and save. As
people responded to this incentive, the need to keep adding to the
network's capacity would fall, thus reducing the need for higher
electricity prices.

Monday, July 14, 2014

As the misadventures of the can-do Commonwealth Bank remind us, even
though our bankers didn't bring the house down in the global financial
crisis as happened elsewhere, we still had too many victims of bad
investment advice losing their savings.

So, what's the answer? Tighter
regulation of banks and investment advisers, or a higher standard of
ethical behaviour by individuals working in banking and wealth
management? Try both.

I'm not so naive as to have much faith in
self-regulation, but that's not to deny that some people's behaviour is
more ethical than others', nor that more individuals behaving ethically
would make a difference.

When you stop believing our personal
behaviour matters, that we're all mere cogs in some uncontrollable
machine, it's time to slit your throat.

My guess is most people
like to think of themselves as reasonably ethical, which is not to say
most of us actually are at all times (not even me). Trouble is, most
people make their judgments about what is ethical and what's not from
the behaviour of those around then.

Moral compasses are hard to
find. But that's why I'd like to see a movement initiated by Dr Simon
Longstaff, of the St James Ethics Centre, the "banking and finance
oath", get more publicity and more signatories. The better known are the
oath and those who've signed up, the better judgments others can make
about how a particular action measures up.

The oath consists of
nine principles: trust is the foundation of my profession; I will serve
all interests in good faith; I will compete with honour; I will pursue
my ends with ethical restraint; I will create a sustainable future; I
will help create a more just society; I will speak out against
wrongdoing and support others who do the same; I will accept
responsibility for my actions; my word is my bond.

The names of
the many signatories to this oath are listed on its website, thebfo.org.
They include Glenn Stevens, Jillian Broadbent, Carolyn Hewson, Warren
Hogan, Andrew Mohl and Elizabeth Proust.

Why doesn't someone ask
the chief executives of the big four banks just what it is that makes
them feel unable to sign up? It couldn't be a threat to their
profitability, surely.

THESE days the world is positively awash
with forecasts of what will happen to the economy. Treasury publishes
its forecasts twice a year, the Reserve Bank publishes four times a year
and a couple of dozen economists in the financial markets make their
forecasts regularly and freely available.

But it wasn't always
like that. Before the financial markets were deregulated in the early
1980s few economists worked in them, the Reserve kept its opinions to
itself and Treasury's official forecasts in the budget papers were kept
terribly vague. Billy Snedden's last budget advised that "economic
growth is expected to quicken considerably in 1972-73".

When I
became an economic reporter in 1974, one of the few unofficial
forecasters was Melbourne University's Melbourne Institute, where the
regular pronouncements of Dr Duncan Ironmonger drew rapt attention from
the media.

And by then Philip Shrapnel's business selling his
forecasts had been going for 10 years, meaning the economic analysis and
forecasting firm BIS Shrapnel is celebrating its 50th anniversary this
year.

Shrapnel, who trained at the Reserve, spent a few years
working as a forecaster for pretty much the only notable management
consulting firm in those days, WDScott, before going out on his own. He
was a character, said to polish off a least half a bottle of scotch as
he stayed up studying the documents on budget night.

A lot of the
people who paid to attend his forecasting conferences - still held today
- would have been there to get his forecasts and plug them into their
company's annual budget. These days my guess is his company makes more
of its money from its research reports on particular industries and its
special focus on property and construction.

Whereas David Love's
rival subscription newsletter, Syntec, made its name from its uncanny
ability to read the mind of Treasury, Shrapnel was fiercely independent.
Not for him the risk-averse strategy of clustering with everyone else
around the official forecast.

His successors retain this approach
of doing their own analysis their own way and sticking to it. Like all
forecasters they've had their misses, but their independence of mind may
explain some notable calls: no downturn as a result of the Asian
financial crisis of 1997-98; a downturn in 2000-01 no one else was
expecting; and no recession following the global financial crisis.

Saturday, July 12, 2014

When the Fair Work Commission announced a 3 per cent increase in the
national minimum wage to more than $640 a week - or almost $16.90 an
hour - from last week, employers hinted it would lead to fewer people
getting jobs and maybe some people losing theirs.

And to many who've
studied economics - even many professional economists - that seems
likely. If the government is pushing the minimum wage above the level
that would be set by the market - the "market-clearing wage" - then
employers will be less willing to employ people at that rate.

That's
because market forces set the market rate at an unskilled worker's
"marginal product" - the value to the employer of the worker's labour.

Almost
common sense, really. Except that such a conclusion is based on a host
of assumptions, many of which rarely hold in the real world. And over
the past 20 years, academic economists have done many empirical studies
showing that's not how minimum wages work in practice. They've also
developed more sophisticated theories that better fit the empirical
facts. It's all explained in the June issue of the ACTU's Economic
Bulletin.

As a result, there's been a big swing in academic
thinking on the question of the minimum wage. Last year, researchers at
the University of Chicago asked a panel of economists from top US
universities whether they agreed with the statement that "the
distortionary costs of raising the federal minimum wage to $US9 per hour
and indexing it to inflation are sufficiently small compared with the
benefits to low-skilled workers who can find employment that this would
be a desirable policy".

Earlier this year, more
than 600 US economists - including seven Nobel laureates - signed an
open letter to Congress advocating a $US10.10 minimum wage. They said
that, because of important developments in the academic literature, "the
weight of evidence now [shows] that increases in the minimum wage have
had little or no negative effect on the employment of minimum-wage
workers".

The first such study, published by David Card and Alan
Krueger in 1994, compared fast food employment in New Jersey and
Pennsylvania after one state raised its minimum wage and the other
didn't. They did not find a significant effect on employment.

Since
then, many similar US "natural experiments" have been studied and have
reached similar findings. In Britain, the Low Pay Commission has
commissioned more than 130 pieces of research, with the great majority
finding that minimum wages boost workers' pay but don't harm employment.

There's
been less research in Australia, but one study by economists at the
Australian National University, Alison Booth and Pamela Katic, suggests
that the facts in Australia seem to fit the "dynamic monopsony" model of
wage-fixing.

Under the simple textbook, "perfect competition"
model of the market for labour, individual firms face a horizontal
supply curve: each firm is so small that its demand for labour has no
effect on the price of labour. It can buy as much labour as it needs at
an unchanged price.

In the dynamic monopsony model, however, each
firm faces an upward-sloping labour supply curve. This is because more
realistic assumptions recognise the existence of "imperfections" or,
more specifically, "frictions".

Such as? Workers may not have
perfect information about all the alternative jobs they could take and
this could make them cautious about moving. Searching for a job may
involve costs in time or money. Workers and jobs may be mismatched
geographically, so changing jobs may involve greater transport costs.
Workers - being humans rather than inanimate commodities - may not have
identical preferences about the jobs available.

In other words, there are practical reasons why it takes a lot for a worker to want to leave their job.

These
frictions, or "transaction costs", are assumed away in the simple
model. But their existence can result in employers having market power,
which they can take advantage of to pay workers less than the value of
what they produce (their marginal product).
Economists call such
power "monopsony" power. Just as a monopolist is a single seller, so a
monopsonist is a single buyer. But don't take that word too literally.
An employer with monopsony power doesn't need to be a monopolist in the
market for its product (the "product" market), nor the sole buyer of
labour in the region or the industry.
"A single employer in a
market with many employers can have monopsonistic power if workers bear
costs of job search," the article continues. In other words, it
possesses a degree of monopsony power.

The point is, if a firm is
facing an upward-sloping labour supply curve and wants to hire more
workers, it may need to pay a higher wage than it is paying its existing
workers. So, if it goes ahead with hiring, it will need to increase the
wage rates of its existing workers.

And this means the firm's
profit-maximising level of employment and wages will both be lower than
they would be under perfect competition.

In such a model, if the
minimum wage rate is set at or below the marginal product of labour,
this won't cause employment to fall and may cause it to rise.
Monopsonistic models don't have an unambiguous prediction for the
employment effect of a minimum wage.

A paper by Bhaskar, Manning
and To, published in the Journal of Economic Perspectives in 2002,
concluded that "a minimum wage set moderately above the market wage may
have a positive effect or a negative effect on employment, but the size
of this effect will generally be small".

It will be interesting to
see how long it takes those many Australian economists who don't
specialise in studying the labour market to catch up with this change in
their profession's thinking.

Wednesday, July 9, 2014

Sometimes I fear Australia has decided to go backwards just as the rest
of the world has decided to go forwards. Take climate change. If the
repeal of the carbon tax gets through the Senate this week there will
probably be celebrations in the boardrooms of all the business groups
that lobbied so hard for its removal.

But if they imagine the lifting
of this supposedly great burden on them and the economy will mean it's
back to business as usual, they'll soon find out differently.

They
may have rolled back the economic cost of doing something about climate
change, but now they'll face the increasing cost of not doing something
about it. As Martijn Wilder, an environmental lawyer with the Baker
& McKenzie law firm, finds in a new report for the Committee for Economic Development of Australia, we're going to be hit from all
sides.

There are the costly physical effects of climate change
we've already started experiencing, there are the consequences for us of
measures our trading partners are starting to take to limit their
emissions, there's the growing reluctance of foreign institutions to
fund new coalmines and power stations and there's the threat to our
fossil fuel industries from ever-cheaper renewable energy.

In case
anyone's forgotten, Wilder reminds us that the physical effects of
climate change include a rise in the sea level, acidification of the
ocean, change in rainfall patterns and an increase in the frequency of
natural disasters, including droughts. Extreme weather may lead to more
bushfires, while heavy rainfall and cyclones may lead to flooding.

Do
you think all that generates no costs to business, no disruption to the
economy? Take the Queensland floods in 2011, Wilder says. They not only
hit insurance company earnings, they also halted production at various
coalmines. This forced up world coal prices, with adverse effects for
industries reliant on coal.

Since we've always had cyclones and
floods, no one can say climate change caused this particular disaster.
But the scientists tell us events such as these will become more
frequent. And the insurance industry's records tell us the number of
catastrophic weather events is already increasing, with the economic
losses associated with weather rising.

As for the idea there's no
hurry in preparing for problems that may not become acute until later
this century, consider this. Had a levee to protect Roma, in Queensland,
been built in 2005, it would have cost $20 million. Since it wasn't
built, $100 million has been paid out in insurance claims since 2008 and
a repair bill of more than $500 million incurred by the public and
private sectors since 2005.

This sort of thing is happening in
other countries, too. Hurricane Sandy, in October 2012, caused
widespread damage in New York, crippling electricity infrastructure and
leaving downtown Manhattan without power for four days. The
record-breaking storm surge alone cost the local electricity company
$500 million and New York businesses $6 billion.

Perhaps such
events explain why many other countries are moving forwards rather than
backwards in their efforts to combat climate change. Australia's coal
and natural gas industries won't escape being affected by tougher
regulation of the use of fossil fuels in the countries to which they
export.

While Europe has had a weak emissions trading scheme since
2005, the Chinese are trialling such schemes in six provinces. South
Korea, one of our main trading partners, is to introduce a scheme next
year. The US is taking direct action to cut power station emissions.

China
is moving to limit coal to 65 per cent of energy consumption by next
year and has banned new coal power generation in Beijing, Shanghai and
Guangzhou. Wilder says this will cut demand from the largest importer of
Australian coal and thus affect the value of big mining and loading
assets in Australia.

The more the rest of the world seeks to
reduce its use of coal and other fossil fuels, the more Australian
businesses need to contemplate the possibility of their mines becoming
"stranded assets" - assets that suddenly become unprofitable and so lose
their value.

Until recently, foreign investors and financiers
haven't taken climate-change risk into account. Now they're starting to
worry not just about the morality of emitting more greenhouse gas, but
the risk that investments in new mines and power stations will lose
their value before they reach the end of their useful lives. The change
started with international agencies such as the World Bank, but is
spreading to pension-fund investors.

Then there's the threat from
the rise of renewable energy. China's goal of becoming a world leader in
renewable energy has made it the world's largest maker of renewable
energy equipment and the single largest destination for investment in
renewables.

Wilder says renewables are reaching a "point of
disruption" and will displace coal and gas power stations in many parts
of the world. In Australia, the sharply rising price of gas is
increasing the cost-competitiveness of renewables.

"Unlike natural
gas and coal, the input for renewable energy is not subject to the
volatility of global energy markets and with renewable costs continuing
to decline, renewable generation represents a safer long-term
investment," he says.

I know, let's get the government to put the kybosh on renewables. That would be a smart move.

Monday, July 7, 2014

It's official: Australia's rate of improvement in the productivity of
labour returned to normal during the reign of Julia Gillard.

How is
that possible when big business was so dissatisfied and uncomfortable
during Gillard's time as prime minister? The latter explains the former.

According
to figures in a speech by Reserve Bank governor Glenn Stevens last
week, labour productivity in all industries improved at an annual trend
rate of 2.1 per cent over the 14 years to the end of 2004, but then
slumped to an annual rate of just 0.9 per cent over the six years to
2010.

This is what had big business rending its garments over the
productivity crisis. Egged on by the national dailies, chief executives
queued to attribute the crisis to the Labor government's "reregulation"
of the labour market, its failure to cut the rate of company tax, plus
anything else they didn't approve of.

Except that, according to
the Reserve Bank's figuring, labour productivity improved at the annual
rate of 2 per cent over the three years to the end of 2013.

So why
no crisis after all? Well, as wiser heads said at the time, much of the
apparent weakness in productivity was explained by temporary factors
such as, in the utilities industry, all those desalination plants built
and then mothballed and, more significantly, all the labour going into
building all those new mines and gas facilities.

No doubt much of
the recent recovery is explained by the many mines now starting to come
on line - meaning we can expect the productivity figures to remain
healthy for some years. Few extra workers are being employed to produce
the extra output - another way of saying the productivity of the miners'
labour is much improved.

But mining hardly explains all the
improvement, so what else? At the time when business complaints were at
their height, many businesses - particularly manufacturers - were
suffering mightily under the high dollar.

Many have been forced to
make painful cuts, abandoning unprofitable lines and laying off staff.
Some have gone out backwards, with the best of their workers being taken
up by rival employers.

Guess what? Such a process is exactly the
sort of thing that lifts the productivity of the surviving firms. In
their dreams, chief executives like to imagine their productivity -
which they perpetually conflate with their profitability - being
improved by governments doing things to make their lives easier.

But
requiring them to be lifters rather than leaners - which is pretty much
what That Woman did - usually gets better results. And since the dollar
remains too high and seems unlikely to come down anytime soon, it's
reasonable to expect the non-mining sector's productivity performance to
continue improving. Who told you productivity was soft and cuddly?

As
for the convenient argument that the productivity slump must surely be
explained by Labor's "reregulation" of the labour market under its Fair
Work changes, it's cast into question by some figuring reported in
another speech last week, from Dr David Gruen, of Treasury.

Gruen
examined the rise in nominal wages over the decade to March this year,
as measured by the wage price index, then compared this aggregate rise
with the rise for particular industries. In contrast to the days when
wage-fixing really was centrally regulated, he found a far bit of
dispersion around the aggregate.

Wages in mining, for instance,
rose a cumulative 9.7 percentage points more than the aggregate. Wages
in construction rose by 5.4 percentage points more and wages in the
professional, scientific and technical sector rose by 2.5 points more.

By contrast, wages in manufacturing rose by a cumulative 0.9 percentage
points less than aggregate wages. Those in retailing rose by 4.3 points
less and those in the accommodation and food sector rose by 7.6 points
less.

Notice any kind of pattern there? It's pretty clear. Wages
in those industries most directly boosted by the resources boom rose
significantly faster than aggregate wages, though not excessively so
considering it was a 10-year period.

By contrast, wages in those
industries worst affected by the boom-induced high exchange rate -
manufacturing and tourism - rose more slowly than the aggregate. Retail had its
own problems, with the return of the more prudent consumer, and its
wages grew by less than the aggregate.

That's just the dispersion you'd expect to see in a "reregulated" labour market? Hardly.

What
it shows is that we now have a genuinely decentralised and more
flexible wage-fixing system, delivering wage growth in particular
industries more appropriate to their circumstances.